Equity markets around the world are higher as positive news around a US-China Phase 1 trade deal possibly being signed this month continues to support risk sentiment.
In many ways, the steady stream of positive rhetoric surrounding the Phase 1 deal isn’t surprising. From the US’s point of view, it’s difficult to get re-elected during a recession. President Trump campaigned on multiple promises, including helping the US “win” again on trade. For this reason, it would be reasonable to believe that the Administration would want to have a deal to talk about rather than a truce. This is especially true given that economic support from a trade deal is more in the Administration’s control than monetary or fiscal policy.
Fiscal policy from Trump’s tax reform bill is fading, and further fiscal support before the 2020 election is unlikely given the composition of Congress. The prospects of additional near term monetary policy help is also fading. At the Fed’s October meeting last week, Chair Powell stated that monetary policy is “in a good place.” So while further easing is possible, the bar for further action has been raised.
From China’s point of view, it also has reasons to push for a deal despite all that has transpired during the negotiation process. China has set a goal of doubling its 2020 GDP relative to 2010 GDP and needs to find ways beyond traditional policy tools to achieve this. A short term deal would provide the foundation needed to make hitting this goal more attainable.
But of course, all of this is relative to the near term. Over a longer horizon, the US-China relationship remains challenged but also unclear. A Phase 2 deal would cover more contentious topics, making those negotiations more difficult. Should President Trump win a second term, it is possible he becomes less concerned about the stock market and the economy and more about his legacy on China. Conversely, should Trump lose re-election, another President could be more focused on other issues rather than the US-China trade deficit, reducing the confrontational stance between the two nations. | |
| HERE ARE THE KEY NEWS STORIES FROM OVERNIGHT: | |
- India, citing national interests, announced that it would not join the China-backed trade deal that 15 other countries are set to sign. Regional Comprehensive Economic Partnership, or RCEP, is a pact that covers a third of the global economy and represents China’s effort to integrate Asia’s economy as it faces slowing domestic growth and America’s push for countries to reject China’s infrastructure loans and 5G technology.
- The most recent polling data out of the UK shows the main parties, especially Labor, gaining ground with smaller parties losing support. It is important to note that it is still very early in the election process with recent history (2017) showing that polls can swing sharply and result in elections delivering a different result than expected. Case in point, the cooperation deal between the Conservatives and the Brexit party appears to have been overstated. The current Parliament will be dissolved Wednesday, leading to 5 weeks of campaigning without any legislative work.
- The RBA will meet tonight and is expected to remain on hold. Governor Lowe has recently made comments about a “gentle upswing” in the economy so it will be worth watching to see how this narrative plays out.
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